1. Consider two countries called Ricardia (Home) and Marxia (Foreign). They can produce
two goods, Apples and Bananas, using a single factor of production, Labour, under con-
stant returns to scale. Goods are freely traded internationally, but factors are immobile
across countries. In Ricardia, 4 labour hours are required to produce each unit of apples, and 3 labour
hours are required to produce each unit of bananas. In Marxia, 1 labour hour is required
for each unit of apples and 2 labour hours are required for a unit of bananas. Ricardia has
a labour endowment of 120 labour hours, while Marxia has an endowment of 60 labour
hours. Consumers in both countries have the same preferences for apples and bananas, de—
scribed by the utility function U(DA, D B) : D A*D B, where D A and D B are consumptions
of apples and bananas. (a) (10 marks) Which country has an absolute advantage in each good? Which country
has a comparative advantage in each good? In the absence of trade, what will be the-
relative price of apples in each country? (10 marks) Construct the world relative supply curve of apples, and graph it. (10 marks) Derive the world relative demand curve for apples, and graph it on the
same diagram in part (b). (10 marks) What is the equilibrium relative price of apples when two countries trade
with each other? (20 marks) Describe the pattern of trade between Ricardia and Marxia, i.e., who
produces, exports and imports what, and how much? Are your results consistent
with Ricardian theory? N.B.: You need to calculate the amount of apples and bananas that each country pro-
duces, consumes and exports / imports. For this part, you may assume for simplicity
that the world price of bananas is normalized to unity. Show your calculations.